Rev. Rul. 55-423

Advice has been requested as to the circumstances under which a participant's interest in an employees' trust described in section 401(a) and exempt under section 501(a) of the Internal Revenue Code of 1954 is made available to him within the purview of section 402(a) of the Code.

Section 402(a) of the Code provides that the amount distributed or made available from a trust described under section 401(a) which is exempt under section 501(a) of the Code, shall be taxable to the distributee `in the year in which so distributed or made available.' It is clear from the language used in section 402(a) of the Code that it was intended, in some circumstances, that a participant, even in a qualified plan, should be subjected to tax upon his interests in such a trust in a particular year even though such interests shall not be actually distributed to him in that year.

A participant's interest in such a trust is not made available to him unless and until it is unconditionally credited to or set apart for him and made subject to his withdrawal or other disposition. Conditions upon such withdrawal or disposition which are without substance however, are not deemed to prevent the participant's interest from being made available. See Rev. Rul. 54-265, C.B. 1954-2, 239. Most cases in which the issue arises as to whether a participant's interest has been made available fall into two general classes, namely, (1) penalties for withdrawal, and (2) a prior irrevocable election to defer distribution to a fixed or determinable future time.

In the penalty type of case a participant, who makes a withdrawal, is required to discontinue his participation in the trust or suffer a forfeiture with respect to a portion of his distributable interest. Discontinuance of participation is the surrender of a valuable right and, as long as that remains a condition for withdrawal of his interest, such interest is not made available to the participant. Compare, Dillis C. Knapp et al. v. Commissioner , 41 B.T.A. 23, and Estate of A. M. Berry v. Commissioner , 44 B.T.A. 1254.

In the deferment by prior election type of case, if the trust indenture, or the plan of which it is a part, provides for an irrevocable election by the employee prior to the time his interest becomes distributable to him to have distribution of such interest deferred to a fixed or determinable future time, such as ten years or upon his prior retirement, severance of employment, death, or disability, his interest is not made available prior to such time or occurrence of any of the events enumerated. So long as an employee's election to defer the actual receipt of a distribution is irrevocable, it is immaterial whether the exercise thereof takes the form of positive action or merely inaction on the part of the employee.

Both in the penalty and deferment by prior election type of case, a penalty or period of deferment which is inconsequential lacks substance and is not deemed to prevent the participant's interest from being made available at the earliest date upon which he could have received a distribution. What is consequential and what constitutes substance depends upon the facts in a particular case, and will be further amplified in subsequent rulings